J.C. Penney dropping sales, permanently cutting prices

Penney wise? Fewer sales, lower prices

NEW YORK — J.C. Penney is permanently marking down all of its merchandise by at least 40 percent so shoppers no longer have to wait for sales to get bargains.

Penney said Wednesday it is getting rid of its hundreds of sales each year in favor of a simpler approach to pricing. Starting Feb. 1, the retailer is rolling out an “Every Day” pricing strategy with much fewer sales throughout the year.

The plan, the first major move by Apple executive Ron Johnson since he became Penney’s CEO in November, is different from Wal-Mart’s iconic everyday low pricing. Unlike Wal-Mart, Penney’s goal isn’t to undercut competitors, but rather to offer more predictable pricing.

Penney’s plan comes as stores are struggling to wean Americans off the profit-busting bargains they have come to expect in the weak economy. The move is risky, though, because shoppers who love to bargain-hunt may be turned off by the absence of sales.

“The big question on investors’ minds will be: ‘How customers will react to a single price point versus a perceived discount under the old strategy?’” says Citi Investment Research analyst Deborah L. Weinswig.

Here’s how Penney’s pricing strategy will work:

■ Sale prices become everyday prices. The company will use sales data from last year to slash prices on all merchandise at least 40 percent or lower than the previous year’s prices. So, a woman’s St. John’s Bay blouse regularly priced at $14.99 could have the “Every Day” price of $7.

■ Fewer sales. The retailer will pick items to go on sale each month for a “Month-Long Value.” For instance, jewelry and Valentine’s Day gifts would go on sale in February, while Christmas decorations would be discounted in November. Items that don’t sell well would go on clearance during the first and third Friday of every month when many Americans get paid. Those items will be tagged “Best Prices,” signaling to customers that’s the cheapest price.

■ New tags. The retailer used to pile stickers on price tags to indicate each time an item was marked down. But now each time an item gets a new price, it gets a new tag too. A red tag indicates an “Every Day” price, a white tag a “Month-Long Value” and a blue tag a “Best Price.”

■ Simpler pricing. Penney will use whole figures when pricing items. In other words, you won’t see jeans with a price tag of $19.99, but rather $19 or $20.

■ New advertising. Ads began airing Wednesday with a shopper screaming “No” to discounts as they look in their mailboxes, a pile of coupons and big sales signs. The company also has a new spokeswoman (talk show host Ellen DeGeneres) and logo (a red outline of a box that features JCP in the corner.) And a 96-page catalog will be mailed each month to 14 million customers, along with other promotional efforts.

The strategy, unveiled at Penney’s investor meeting Wednesday, comes as the retailer tries to turn around its business. Heavy discounting has hurt department stores like Penney. The group generates an average of about $200 per square foot, less than half the $550 or $600 stores like Victoria’s Secret and Lululemon make per square foot, according to John Bemis, head of Jones Lang LaSalle Inc.’s retail leasing team.

But Penney has been a laggard even among department stores as its core middle-class customers have been among the hardest hit by the weak economy. It’s also failed to attract younger customers even though it’s added hip brands like Mary-Kate and Ashley Olsen’s teen clothing collection called Olsenboye. The stores also have been labeled by Johnson himself as “tired.”

For the 11 months through December, Penney’s revenue at stores opened at least a year — an indicator of a retailer’s health — rose 0.7 percent, while competitors like Macy’s Inc. rose 5.4 percent, and Kohl’s was up 1.1 percent. Penney posted a loss in the third quarter and cut its fourth-quarter earnings outlook after a disappointing holiday season when it had to heavily discount to attract consumers.

The new pricing caps months of speculation about what Penney’s future might look like under the leadership of Johnson, a former Target Corp. executive and the mastermind behind the success at Apple Inc.’s stores.

Johnson, who joined the company’s board in August, already has put his stamp on the retailer. He has tapped former colleagues at Apple and Target to join him at Penney. That includes Target’s top marketing executive, Michael Francis, to be Penney’s president.

Johnson also is borrowing from the playbook of Apple, which shuns discounting and focuses on selling products and offering services.

In December, Penney said it will have homemaker doyenne Martha Stewart develop mini-shops starting next year. And during Wednesday’s meeting, Penney executives outlined plans to in the next two years add Main Street, a series of 80 to 100 brand shops in stores similar to the Martha Stewart ones. It also plans to open areas in all stores called Town Square, a place that will offer services and expert advice, similar to Apple’s Genius bars.

Perhaps the biggest challenge for Penney is to sell shoppers on its new pricing. For years, Penney, like many other stores, has propped up price. The intent: to make it look like shoppers are getting great discounts when items go on sale.

Penney has been an especially big promoter. Last year, the company, which offered 590 sales events last year, nearly three-quarters of its revenue come from merchandise that was discounted by 50 percent or more.

That’s more than double the retail industry average. According to an estimate by management consultant firm A.T. Kearney, a typical retailer sells between 40 and 45 percent of its inventory at a promotional price, up from 15 to 20 percent a decade ago.

The increased discounting has been a vicious cycle that only feeds into shoppers’ insatiable appetite for bigger and better discounts. In fact, whereas it took 38 percent off to get shoppers to buy 10 years ago, it now takes discounts of 60 percent, Johnson says.

At Penney, the regular price on an item that costs $10 to make rose 43 percent, from $28 in 2002 to $40 in 2011. But because of all of its sales and other promotions, what it actually ended up selling for rose only 15 cents, from $15.80 to $15.95 during that same period.

“I have been struck by the extraordinary amount of promotional activity, which to me, didn’t feel like it was appropriate for a department store,” Johnson says. “Once you start to promote, the only way to beat a promotion was to make it bigger.”

Walter Loeb, a New York-based retail consultant, says Penney’s new pricing is “visionary” and revolutionary.”

But Charles Grom, a retail analyst at J.P. Morgan, says it will be difficult for Johnson to change shoppers’ buying habits. Macy’s, for example, cut back on coupons a few years ago, only to reverse courses after sales fell.